MAY 14, 2024

By CA Rishabh Kumar Sawansukha & CA Rahul Kant

Introduction

THE pharmaceutical landscape in India is currently contending with significant financial challenges due to the Goods and Services Tax (GST) regime, particularly concerning the reversal of input tax credit (ITC) on expired medicines that are subsequently destroyed. This discourse delves into the nuances of this predicament, highlighting the implications of Circular No. 72/46/2018-GST on the return of expired drugs, dissecting Section 17(5) of the Central Goods and Services Tax Act, 2017 (CGST Act), and examining a notable legal challenge mounted by Abbott India before the Telangana High Court.

GST Circular and Compliance Framework

Circular No. 72/46/2018-GST, promulgated by the GST Policy Wing on 26th October 2018, elucidates the protocols for the return of time-expired drugs. According to this directive, expired products returned can either be reclassified as a fresh supply, thereby enabling the recipient to claim ITC on the returned goods, or managed through credit note issuance, contingent upon the timing of the return and the feasibility of tax liability adjustment. Crucially, when these returned goods are destroyed, the manufacturer is mandated to reverse the ITC on the returned goods' value (if treated as fresh supply) and on the original manufacture's value (if processed through credit notes).

Section 17(5) of the CGST Act: A Critical Examination

Section 17(5) of the CGST Act addresses situations involving goods that are lost, stolen, destroyed, or written off, necessitating the reversal of ITC claims in such cases. For the pharmaceutical industry, this translates to a mandatory ITC reversal on expired drugs, leading to considerable financial detriment with each instance of unsold medicine expiration.

Economic Implications: Industry Analysis

The financial ramifications are profound. Pharmaceutical entities not only forfeit revenue from unsold inventory but also incur tax charges on inputs initially projected to yield future profits. This condition effectively penalizes companies for variables often beyond their control, such as unpredictable demand fluctuations and challenges in accurately forecasting market requirements.

Case Study: Abbott India's Legal Challenge

The complexity of this issue is further underscored by Abbott India's petition before the Telangana High Court. Abbott contends that the Circular's requirements result in a form of double taxation for pharmaceutical firms, as they are deprived of the ITC initially claimed on inputs for manufacturing drugs that are subsequently destroyed due to expiration. The court has slated final arguments for early August 2024, with the pharmaceutical industry eagerly anticipating a ruling that could potentially mitigate this financial strain.

Industry Impact and Future Outlook

Abbott India's ongoing litigation represents a pivotal moment for the sector. A favourable court decision could prompt amendments to the GST framework, potentially allowing companies to retain ITC on inputs for medicines destroyed post-expiration. Such a development would offer significant financial relief and enhance predictability in managing tax obligations.

Conclusion and Strategic Recommendations

In light of the intricacies and potential financial burdens associated with GST compliance on expired medicines, it is imperative for pharmaceutical companies to engage with seasoned tax professionals to adeptly navigate these challenges. Proactive planning and strategic management of tax liabilities should be prioritized, alongside active participation in advocating for more advantageous tax regulations concerning expired goods. The resolution of the Abbott India case may also establish new precedents for managing GST on expired pharmaceutical products, making it an essential case for all industry stakeholders to monitor closely.

Pharmaceutical companies are encouraged to align their GST compliance strategies with expert guidance, ensuring they are well-positioned to adapt to regulatory changes and optimize their financial performance in an evolving tax landscape.

[The views expressed are strictly personal.]